Periodic Reporting for period 4 - FIRMNET (Firms and Their Networks)
Período documentado: 2022-03-01 hasta 2024-02-29
After the first Trump-led anti-globalization effort followed by the Covid19 pandemics, the 2025 Tariffs war has placed the global geographic structure of manufacturing and services center stage. Firms and their Networks, the ERC project about which I report here, by taking stock of this fragmentation is trying to understand how firms and workers cope with uncertainty in such a dangerous world. Such shocks can have an economic origin – as in the Tariffs war episode – as well as a technological origin, when new products or services become available to workers and firms, such as the emergence of platforms (Uber, Mechanical Turk, …). The various types of relations that connect workers and their firms, merging from mere employment relations or social connections, as well as between two (or more) firms, such as suppliers to buyers or because these firms belong to a common board, may induce multiple reactions when faced with these shocks. The project examines workers’ and firms’ reactions in various changing environments..
The construction of a web of social relations surrounding firms is one strategy used to maintain their existence or even thrive in this unstable world. How firms build such a network, when and how these social relationships are mobilized is studied using data from Sweden, together with Oskar Nordström Skans (University of Uppsala). These relations may stem from family bonds, past and present co-workers, the neighborhood acquaintances, school or university-built connections, as well as relations built within a firm’s boardroom. Results show that social connections direct workers’ movements between firms. For instance, when a manager or a CEO enters a boardroom and by so-doing generates a novel connection between two firms, workers’ movements between the newly-connected firms increase markedly, for instance when (long-term) sickness absence hits a worker employed in one of these two firms. Such moves help firms replace workers rapidly and, as a consequence, make firms more productive. And these moves do not increase inequality. Indeed, even though connections per se appear to be positively sorted i.e. high-quality workers are connected to other high-quality workers who tend to be employed in high-paying firms, realized mobility counteracts this tendency by favoring movements to relatively low-paying firms which often face hiring difficulties.
Another component of the project uses direct measures of firm-to-firm connections based on French Customs data to understand how firms react to direct micro-economic shocks. To do so, we rely on every transaction made by French exporters between 1995 and 2016 with their European customers. Then, we assess how French firms react to the disappearance of one of their clients. Because these firms tend to be badly diversified, this shock translates into a sizable effect on the firm’s economic outcomes, in particular when the firm’s export history has not stabilized.
Another strategy to understand how firm-to-firm connections affect the economy is offered in a more structural project. This strand of the research proposes a totally new model of firm-to-firm connections based on random encounters between suppliers and buyers which allows us to confront a set of empirical moments constructed from the above data with their theoretical equivalents derived from the model. Then, a full-fledged estimation of the model's parameters helps us analyze counterfactual predictions. The resulting article is now (conditionally) accepted at one of the most prestigious economic journals (Econometrica). In the model, a buyer can produce goods either with workers or with purchased inputs and chooses the cheapest. A producer is both a seller of goods and a buyer of inputs. Hence, a chain of exchanges “spontaneously” emerges throughout the world, and our model creates a value chain based on each firm’s comparative advantage and chance (in meeting with sellers). This roundabout process is shown to be stable in that it generates a General Equilibrium (GE). The different components in this economy are modelled (producers, wholesalers, retailers, services, households) in a unified framework allowing an analysis of global labor market reactions to shocks. For instance, workers may move from the goods producing sector to services sectors with the wages of production workers reacting to international trade forces (tariffs, changes in transaction costs…). We illustrate the mechanisms at work by looking at the effects of the entry of Eastern European countries into Europe.
The model just described features a unique wage per skill whereas data show that wages for workers endowed with similar skills vary across firms. Hence we have developed a model based on the previous framework which generates such a firm-to-firm variation. When firms price their output to buyers at the second lowest price offered to the same buyer (i.e. Bertrand pricing), firms end up with positive profits (in contrast to the previous model). Hence, a phase of bargaining between workers and their employees is likely to take place. This new model offers predictions that are fully in line with what is known of the relations between a firm’s exports or its imports and its wage, for both skilled and unskilled production workers. It will be used in our future research projects.
Another component of the project uses direct measures of firm-to-firm connections based on French Customs data to understand how firms react to direct micro-economic shocks. To do so, we rely on every transaction made by French exporters between 1995 and 2016 with their European customers. Then, we assess how French firms react to the disappearance of one of their clients. Because these firms tend to be badly diversified, this shock translates into a sizable effect on the firm’s economic outcomes, in particular when the firm’s export history has not stabilized.
Another strategy to understand how firm-to-firm connections affect the economy is offered in a more structural project. This strand of the research proposes a totally new model of firm-to-firm connections based on random encounters between suppliers and buyers which allows us to confront a set of empirical moments constructed from the above data with their theoretical equivalents derived from the model. Then, a full-fledged estimation of the model's parameters helps us analyze counterfactual predictions. The resulting article is now (conditionally) accepted at one of the most prestigious economic journals (Econometrica). In the model, a buyer can produce goods either with workers or with purchased inputs and chooses the cheapest. A producer is both a seller of goods and a buyer of inputs. Hence, a chain of exchanges “spontaneously” emerges throughout the world, and our model creates a value chain based on each firm’s comparative advantage and chance (in meeting with sellers). This roundabout process is shown to be stable in that it generates a General Equilibrium (GE). The different components in this economy are modelled (producers, wholesalers, retailers, services, households) in a unified framework allowing an analysis of global labor market reactions to shocks. For instance, workers may move from the goods producing sector to services sectors with the wages of production workers reacting to international trade forces (tariffs, changes in transaction costs…). We illustrate the mechanisms at work by looking at the effects of the entry of Eastern European countries into Europe.
The model just described features a unique wage per skill whereas data show that wages for workers endowed with similar skills vary across firms. Hence we have developed a model based on the previous framework which generates such a firm-to-firm variation. When firms price their output to buyers at the second lowest price offered to the same buyer (i.e. Bertrand pricing), firms end up with positive profits (in contrast to the previous model). Hence, a phase of bargaining between workers and their employees is likely to take place. This new model offers predictions that are fully in line with what is known of the relations between a firm’s exports or its imports and its wage, for both skilled and unskilled production workers. It will be used in our future research projects.
This search for a model helping us understand how workers and firms are matched, with the associated optimal wage setting, is pursued in the fourth project in association with Philippe Choné. There, workers are endowed with multidimensional skills which cannot be unpacked – skills are said to be bundled – in the absence of skill-specific labor markets, in a world where firms a) differ in how they value each skill dimension in their production technology and differ in their productivity; b) aggregate their workers’ skills to produce; c) and optimally choose their size? Because bundling prevents workers from selling their skills separately, one by one, on skill-specific markets, the implicit price of each skill is shown to vary across firms, workers’ sorting into firms is shown to depend on their comparative advantage, and firms’ (unique) size is shown to increase in productivity. The (unique) equilibrium wage function is shown to be log-additive in worker quality and a “firm component” that reflects the firm’s aggregate skill-mix, the equilibrium matching, and, potentially, the firm’s productivity. Furthermore, we show that Generalists’ workers – endowed with a balanced set of skills – suffer from a wage markdown in a purely competitive framework (and, hence, no firm’s monopsony power). This setting is particularly helpful in understanding how firms and their workers are affected in today’s world in contrast to the recent past. More precisely, we study what happens when one of the k markets for skills opens, something we label “unbundling” starting from a bundled world. Unbundling may be due to technological shocks, such as the advent of Uber, that transforms a market (for taxi rides, in the case of Uber) or a legislative change, again opening a market for a skill, a task, that could not be exchanged and priced (such as some types of business services in Germany before the Hartz reforms) in the past because of bundling. In a modeling effort made in association with Nathael Gozlan, a mathematician, we fully characterize how the equilibrium changes when unbundling takes place, the firms and the workers who benefit from this opening and, by contrast, the firms and the workers who are harmed. To confront our theory with facts, Philippe Choné, myself, together with Oskar Nordström Skans, we currently assess the empirical support of this novel theory using Swedish data on workers’ Cognitive and Non-Cognitive skills, and their employers.